Binary options are classed as exotic options, yet binaries are extremely
simple to use and understand in terms of functionality. Providing
access to stocks, indexes, commodities and foreign exchange, the options
can also be called a fixed-return option (or FRO). This is because the
option has an expiry date/time and also what is called a strike price.
If a trader wagers correctly on the direction of the market and the
price at the time of expiry is on the correct side of the strike price,
the trader is paid a fixed return regardless of how much the instrument
moved. A trader who wagers incorrectly on the direction of the market
ends up losing a fixed amount of her investment or all of it.
If a trader believes the market is going higher, he would purchase a "call". If the trader believes the market is going lower, she would buy a "put". In order for a call to make money, the price must be above the strike price at the time of expiry. In order for a put to make money, the price must be below the strike price at the time of expiry. The strike price, expiry, payout and risk are all disclosed at the outset of the trade. The payout and risk may fluctuate as the market moves, since a call that is "in the money" by a great degree stands a good chance of finishing in the money if there is a short time to expiration. Yet, the pay rate out and risk that was locked in by the trader when the trade was taken will stand at expiration. This means different traders, depending on when they enter may have different pay outs.
If a trader believes the market is going higher, he would purchase a "call". If the trader believes the market is going lower, she would buy a "put". In order for a call to make money, the price must be above the strike price at the time of expiry. In order for a put to make money, the price must be below the strike price at the time of expiry. The strike price, expiry, payout and risk are all disclosed at the outset of the trade. The payout and risk may fluctuate as the market moves, since a call that is "in the money" by a great degree stands a good chance of finishing in the money if there is a short time to expiration. Yet, the pay rate out and risk that was locked in by the trader when the trade was taken will stand at expiration. This means different traders, depending on when they enter may have different pay outs.
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